States Leading on Energy Storage — but the Feds can Still Help

Before it adjourned last year, Congress declined to act on multiple pieces of energy storage legislation including the Energy Storage Tax Incentive and Deployment Act of 2019. But across the country, states are taking the lead in advancing this innovative technology –– opening new opportunities for commercial and industrial facilities seeking to incorporate storage into their energy mix.

The state action makes sense, given the urgent need for resilient energy. Our aging grid infrastructure and the destruction caused by extreme weather and events like California’s devastating wildfires demand resilient energy solutions.

In the 2019 State of Reliability, the North American Electric Reliability Council (NERC) confirms in its first key finding that “Extreme weather events continue to be leading contributors to transmission, generation, and load loss.” These seemingly unrelenting natural events have a devastating impact on health and safety, coupled with significant financial losses experienced by affected communities and businesses. This is on top of the typical planned (maintenance) and unplanned (squirrel damage) disruptions that can impact the electric grid and daily business operations.

On normal days, a loss of household power for a few hours is not an emergency, but businesses of all sorts experience outages quite differently and can lose tens of thousands of dollars from even a short interruption. For example, average losses from an outage at a data center can be more than $9,000 a minute and the average total cost of an outage is nearly $750,000. In total, power outages lead to tens of billions in lost annual revenue and opportunities across the US economy.

These factors — coupled with precipitously declining prices for energy storage systems — are driving rapid acceleration in US installations, from small systems hanging on garage walls to data center complexes with tens of thousands of interconnected battery cells. The industry nearly doubled installations in 2018 and was on pace to double again last year.

Energy storage systems can respond instantly to the real-time state of the electric grid, which is not only valuable for resilient power supply and backup during a storm, but also can be designed to provide ancillary services to keep the grid balanced and consistent. This includes a host of technical functions like frequency response, voltage support and infrastructure deferral. These additional services can potentially cement the practicality of energy storage installations.

Using energy storage to manage utility bills

Since monthly utility bills are becoming increasingly complex and expensive, the fastest growing segment of the energy storage market is customer-sited solutions — those installed for businesses and homes.

While per kilowatt-hour rates have not risen considerably over the past decade, commercial and industrial customers are finding a number of new types of charges being assessed on their bills, including time-of-use (TOU) rates, peak demand assessments and new service fees. These new, more dynamic utility charges offer both challenges and opportunities for building owners and energy managers. Peak demand charges, making up the lion’s share of monthly utility expenses, are of particular concern for business customers, and hence are proving to be a significant driver for energy storage installation.

Demand charges are assessed based on a customer’s peak demand — the highest amount consumed during a short interval, like 15-30 minutes — and are typically assessed on top of monthly electric use charges. If a building’s demand is typically 250 kW, yet it spikes to 1 MW during a peak period, the owner will incur the same demand charge as a building that uses 1 MW all the time. Similarly, if a building is able to reduce its peak load during these daily windows, they can greatly reduce overall utility expenses from reduced demand charges.

Energy storage systems are able to rapidly respond to changes in a customer’s load and can set a ceiling for a customer’s demand during peak price periods. Energy storage systems can effectively shift a building’s load to times of day when energy is cheaper and inject electricity into the grid when it is most needed and valuable.

Customer systems, as opposed to those installed by utilities, accounted for more than half of the 777 MWh of energy storage deployed in the US in 2018, and final numbers from 2019 are on pace for installations to double once again — largely driven by on-site energy storage solutions.

This meteoric growth comes despite the currently disjointed landscape of differing regulations, incongruent market rules, and sometimes conflicting codes and standards that energy storage systems face. These rules vary state-to-state, city-to-city, and even block-by-block, requiring dynamic financial models and an understanding of the evolving risks and mitigating strategies.

State action on energy storage

Recognizing the dynamic value of energy storage, four states — California, Massachusetts, New York, and Oregon — have established deployment targets, and three — Connecticut, Nevada, and New Jersey — have directed their regulators to do so. Utilities are also jumping in with major initiatives such as Hawaiian Electric’s 1 GWh announcement in 2019 (more than all 2018 US installations combined), and customer-sited energy storage programs such as the innovative leasing model used by Green Mountain Power.

On top of deployment targets, states are also creating different incentive programs (such as California’s Self-Generation Incentive Program) to encourage investment and speed installation. Some states are providing large incentive packages to set up new factories and manufacturing hubs in the hopes of capitalizing on this global opportunity. The US energy storage industry already employs more than 115,000, and annual market size is expected to reach $4 billion by 2024.

But these disparate state initiatives and varying local regulations are creating a complex and challenging headwind for the continued success of energy storage. While technical experts debate the intricacies of arcane regulatory law and market price signal guidelines (still unsettled is if energy storage qualifies as a ‘generator’ in many markets), businesses are missing out on the cost-saving and resilience benefits of these systems.

Value of federal tax credit for energy storage

Currently, it is possible for energy storage components to receive a federal investment tax credit (ITC) when installed with qualifying renewable energy systems under certain circumstances. But there are two areas where this opportunity is lacking — retrofits and standalone storage systems.

In both cases, potential projects need to seek special dispensation from the Internal Revenue Service through a Personal Letter Ruling, a prohibitive burden. Even though it has routinely approved individual requests, noting that storage inclusion fits the intent of the ITC regulations, the arcane process prevents many from pursuing that opportunity.

Inclusion of energy storage as an independent part of the ITC would help ensure that businesses can access energy storage solutions, saving them money while also increasing the performance and resilience of the grid as a whole.

It is important for Congress to clarify the rules regarding the ITC, and pass legislation that allows for energy storage systems to qualify for the incentive program independently. Removing this hurdle and simplifying regulations will provide the tailwind that the industry needs to spur additional investment, manufacturing and installation for advanced energy storage systems.

A more resilient, affordable electricity network can be within reach of millions of businesses and homeowners across the country. An energy storage ITC will help unlock that future.

In an era where reliable power is increasingly important — and increasingly at risk — it’s a good idea for businesses to investigate energy storage systems. Knowing which is right for you requires a careful look at your operation and its energy needs. That’s what Priority Power Management does. If you’re interested in looking more deeply at a resiliency solution for your business, we’re happy to help as your trusted advisor. Give us a call!